I do not survey the enormous literature on the methodology... The writers debate instrumentalism, the use of rhetoric to discuss rationality, whether assumptions need be realistic, and whether economic propositions are, or should be, falsifiable,

Philosophers, on the other hand, commonly believe that economic logic focuses on instrumental rationality, as exemplified by a Humean ends-means logic.

Philosophers have put forth alternative notions of rationality, including “practicalreasoning,”procedural rationality (do our mental processes for forming values make sense?), and expressive rationality (do we have the right ends or values?). From a philosophic perspective, economic rationality is only one

for this reason economics appears radically incomplete as a "final theory of the world,"

In particular, I stress that there is no single, monolithic economic method

I explicate modern economic method by searching out and identifying the differences across fields, rather than forcing everything into an account of the underlying unities.

We frequently observe some rationality concepts displacing others. The rational expectations assumption gained in prestige in the 1970s and 1980s and now holds a secure foothold. In more recent times it has been challenged by behavioral assumptions

1. Description In this view the rationality postulate describes individual behavior and has definite empirical implications. These implications are in principle falsifiable.

2. Transitivity only... Some economists believe that rationality requires only the postulate of transitivity of preference. Transitivity, in this context, stipulates that if A is preferred to B, and B is preferred to C, then A is preferred to C. In other words, preferences can be represented by a global rank ordering.... Note that the transitivity only view can be a special case of the first "descriptive"

3. Tautology Any and all behavior can be described as rational... The rationality postulate therefore involves no substantive commitment to any empirical claims. A strong version of this view postulates that rationality is a useful tautology,

4. Pragmatic, Milton Friedman. or useful organizing category This view rejects foundationalist approaches to rationality. We do not necessarily know exactly what the rationality postulate does or means. Nonetheless economists who use the rationality postulate come up with better work and better ideas than those who do not.

5. Normative Individuals are not always rational, but rationality is an ideal that we should strive to achieve. Economic theory can be used to improve the quality of decision-making.

a. Theory of the consumer It concerns how to represent preference orderings, relative price effects, income effects...Strictly ordinal utility theory, under conditions of perfect certainty, typically treats the rationality postulate as a tautology.... Virtually nothing could refute the hypothesis that individual behavior can be described in such terms.....Even observed "intransitivities" can be redescribed as "changing preferences over time."

b. Theory of the consumer under uncertainty... The theory of choice under uncertainty started with von Neumann-Morgenstern subjective expected utility theory and since expanded to cover various modifications of that basic approach.... In contrast to the theory under certainty, economists typically do not treat their theories of expected utility as tautologies. To the extent the empirical tests reject the axioms, it is considered grounds for rejecting the theory.... Most notorious in this regard in the so-called "independence axiom."...This axiom is contradicted by the evidence, whether we look at questionnaires or experiments with real dollar prizes....The Allais paradox provides the best known counter to the independence axiom.

c. Macroeconomics... most of the important work in macroeconomics over the last thirty years has used the RE assumption. Rationality, for macroeconomists, refers primarily to rationality of expectations... RE means that individuals understand the "true model"... forecasts are scattered around the true variable but with a correct mean. Finally, RE may mean that errors are serially uncorrelated over time.

Economists put these assumptions into macroeconomic models for several reasons. First, some economists believe those assumptions are roughly true. A more common view is that they provide a kind of modeling discipline. The view is commonly voiced that "errors can be used to explain anything."

Similarly, RE fails tests in the laboratory setting.... Rationality, in the form of RE, is considered testable, both in principle and in reality.

d. Theory of finance... Finance concerns the pricing of market securities... EMH comes in many forms, some weaker, others stronger. The weaker versions typically claim that deliberate stock picking does not on average outperform selecting stocks randomly, such as by throwing darts at the financial page. The market already incorporates information

Note that the weak version of EMH requires few assumptions about rationality. Many market participants may be grossly irrational or systematically biased in a variety of ways. It must be the case, however, that their irrationalities are unpredictable to the remaining rational investors. If the irrationalities were predictable, rational investors could make systematic extra-normal profits

The stronger forms of EMH claim that market prices accurately reflect the fundamental values of corporations and thus cannot be improved upon.

So the assumptions about rationality in strong EMH are tricky. Only one person need be rational, but through perfect capital markets, this one person will have decisive weight on market prices.

"Behavioral finance" is currently a fad in financial theory, and in the eyes of many it may become the new mainstream.

Robert J. Shiller claims that investors overreact to very small pieces of information,

e. Empirical labor economics...Empirical labor economists tend to be among the least theoretical of economists, and tend to be the most likely to defer to the data.

A hypothesis known as "efficiency wage" theory stresses how higher wages can make workers more productive,

Given the difficulty of establishing clear theoretical predictions, labor economists tend to be among the most positivistic of economists. They consider the test to be everything,

f. Game theory... In game theory, notions of rationality are highly specific and economists debate the propriety of one notion against another.

When we move to game theory, and the world of strategic interdependence, dominant strategies frequently do not exist. The payoff of a given strategy depends on what the individual expects others to do. Often no single strategy yields higher returns for every possible response from others.

Nash equilibrium thus represents one attempt of game theory to model the notion of rationality in a game. In more complicated games, game theorists resort to such notions as "subgame perfection," "time consistency," "perfect Bayesian equilibrium," and many others.

The simplest way of generating multiple equilibria is to set up coordination game with two possible points of high return. Very large numbers of equilibria arise most easily when we consider trigger and response strategies.

g. Experimental economics...Experimental economists test economic propositions in a controlled laboratory setting with real dollar prizes....Virtually every economic assumption about individual behavior has been subject to test in a laboratory setting. Furthermore, virtually all of these assumptions have been falsified.

h. Economic imperialism... Some economists argue that the economic method should be extended to many or all of the other social sciences

.. Gary Becker's work on the economics of the family is a prototypical example of economic imperialism.

I am not aware of a philosophically sophisticated defense of economic imperialism (advocates tend to believe in the primacy of practice), but the following defense might be offered in response to these problems. Rational choice explanations, in the realm of economic imperialism, are most defensible when we think of them as complements to alternative approaches, rather than substitutes.

i. Fixed preferences? Some researchers treat the constant preference assumption as part of the core of rationality and the economic approach, especially as applied to other disciplines.... Economists are more likely to accept explanations based on varying preferences across individuals than explanations based on changing preferences for a single individual.

Fischer Black invoked changing preferences as a fundamental cause of business cycles.

j. Satisficing... The early work of Herbert Simon, Richard Cyert, and James March led to the idea of "satisficing." Satisficing refers to the idea that individuals do not seek the very best outcome, but rather they stop once they find an outcome that is "good enough."

k. Computation... Satisficing approaches typically postulate an absolute stopping rule at some point. Computational approaches attempt to derive when an individual will stop calculating, depending on the complexity of the problem at hand. So we can think of computational approaches as providing a kind of microfoundations for satisficing.

..The choice of computational algorithm is not given a priori, but is continually up for grabs.... Critics believe that computational models can generate just about "any" result, depending on the assumptions about what is computable.

IV. Concluding remarks

Competizione sulla razionalità. A rationality concept, in this regard, is like a market price or a management practice.

effective criticism of economics must start with the institutions that produce (and evaluate) economics. Methodological criticisms alone, especially if they focus on rationality, are unlikely to be very persuasive....recognize the strongly plural character of research practice.